_{SHOPPING FOR
FINANCING}
For many home buyers, shopping to find
the best home financing is as important as shopping to find the right house.
After all, a small difference in the mortgage rate can make a big difference in
monthly payments.
Many consumers learn about available credit terms for new homes from newspaper
advertisements. But consumers may not know what to look for when they compare
credit terms in home advertisements.
Here are answers to some questions you may have about home credit advertising.
What terms must a home financing ad contain?
There is no federal requirement that ads for homes provide information about
credit terms. But the Federal Truth in Lending Act requires that if an ad
includes certain credit terms, such as the amount or percentage of the
downpayment (in a credit sale), the amount of the monthly payment, the length of
the loan, or the amount of the finance charge, it also must include all of the
following information:
* the amount or the percentage of the downpayment (in a credit sale);
* the terms of repayment (i.e., the amount of the monthly payment and the length
of the mortgage); and
* the rate of finance charge, expressed as the "annual percentage
rate." (See next section for definition.)
If an ad includes any interest rate, such as the simple interest rate or rates
that apply for a limited period of time, the law requires that the annual
percentage rate also be advertised. If an ad says "10% financing,"
"the equivalent of 6%," or simply "8%," the advertised rate
is probably not the annual percentage rate. The actual cost of the credit is
likely to be higher. Therefore, you should ask for the annual percentage rate
and compare terms.
What is the difference between the annual percentage rate and other
interest rates?
The annual percentage rate (APR) includes all the costs of credit; other
interest rates do not. For example, the "simple" interest rate is the
one usually shown on the mortgage document. It does not reflect additional costs
to cover such items as "points" (fees charged when the mortgage is
closed) or mortgage insurance. If an ad does not include the APR, it does not
tell you everything you need to know about the cost of credit.
For example, suppose you had to choose between a 9 percent simple interest rate
and a 9 percent APR on a 30year loan. Also suppose the house cost $110,000 and
you made a $10,000 downpayment, leaving $100,000 to be financed. Because of the
small downpayment, many lenders would require you to buy mortgage insurance,
often costing one half of one percent of the loan balance. With a 9 percent
simple interest rate, the extra cost for the mortgage insurance, and other loan
origination fees, your monthly payments might be as high as $841. But with a 9
percent APR, which includes the cost of mortgage insurance and other loan
origination fees, your monthly payments should not exceed $805. The difference
between these two rates could be $36 a month and thousands of dollars over the
loan.
What should I look for in ads offering "creative
financing"?
Creative financing plans typically include lower payments in the earlier
years of the financing plan, interest rates that can change during the entire
term of the loan, or some combination of these features. Look for the following
information in the ad, or ask the lender these questions:
* Will the interest rate or the monthly payments change during the term of
the loan? In some loans, a belowmarket rate and lower payments apply only
for the first few years, but higher rates and payments follow for the remainder
of the loan term.
* How will the new interest rate or the monthly payments be calculated?
The increased rate and payments are stated in advance in some mortgages. In
others, they are tied to certain indexes and depend on future market conditions.
In these loans, the amount and frequency of the changes in your interest rate
and payments also depends on the terms of your loan agreement.
* Will the advertised monthly payments be large enough to pay off the
mortgage? Some mortgage plans offer low monthly payments even though the
interest rate is fairly high. If these monthly costs are not enough to repay the
loan amount and the interest charges, the difference may be added to the
principal. In some plans, you could owe more at the end of the mortgage term
that at the beginning.
* Will you have to refinance the mortgage after a few years? If a large
or "balloon" payment is due after a few years and you do not have the
necessary cash, you may have to refinance the mortgage. If you do refinance and
interest rates have risen, you may have to make much higher monthly payments
than you had planned.
How can I tell if the advertised credit includes monthly payments
or interest rates that will change?
Phrases such as "effective rate," "adjustable rate," or
"flexible payments" indicate that the credit terms may change. If you
see any of these phrases in an ad, find out more about the credit terms. For
example, if an ad offers a "7% effective rate," look for other
information, such as the APR, to tell you the full cost of credit.
Where can I get more information about home financing?
While credit advertising can help you compare financing plans, it is
important to get more detailed information before deciding on a mortgage,
especially if creative financing plans are involved. It may be worthwhile to
consult a professional, such as an attorney, accountant, or banker for help in
understanding various home mortgage plans.
